In an effort to encourage whistleblowing activity, the North American Securities Administrators Association (NASAA) is proposing model legislation featuring financial awards for tips to regulators.
NASAA’s proposed model act includes providing state regulators with the authority to pay monetary rewards to whistleblowers who provide information that leads to significant enforcement action.
At the federal level in the U.S., the Securities and Exchange Commission (SEC) has paid out US$450 million in whistleblower awards under its program, which was introduced in 2012.
NASAA’s model legislation for states is modelled in part on the SEC’s regime, and also on state laws in Utah and Indiana that provide for financial payouts to tipsters.
NASAA reported that Indiana’s law helped uncover an issue that led to a US$950,000 settlement with a large Wall Street firm and a whistleblower award of US$95,000. Regulators in Utah paid an award to a financial advisor “who reported a suspicious investment” that was sold to one of his clients.
The NASAA proposal, which is out for comment until June 30, provides for awards of up to 30% of the amount recovered by regulators.
It also includes provisions to protect the identity of whistleblowers, to prohibit retaliation and to create a cause of action for whistleblowers who do face retaliation from their employer.
“The intent of this model legislation is to incentivize individuals who have knowledge of potential securities law violations to report it to state regulators in the interest of investor protection,” said Christopher Gerold, president of NASAA and chief of the New Jersey Bureau of Securities.
Gerold noted that whistleblower tips “can lead to the earlier detection of securities law violations, which, in turn, provides regulators with a greater opportunity to stop the [alleged conduct] sooner, and prevent additional investors from being harmed.”